A takeover is a process by which one company purchases the other company. The company making the purchase is the acquirer company while the one being bought is the target company.
When taking over an NBFC, the acquirer should firstly conduct due diligence of the target company. The financials of the target company should also be carefully perused, to check the actual business standing of the NBFC. This way the acquirer gets to know the real financial position of the target company and can take the decision of taking over accordingly.
NBFC Takeover can be of two types:
Friendly Takeover: This takeover happens with mutual consent of both the companies. The offer of taking over is made by the acquirer and the same is accepted by the target company.
Hostile Takeover: In this type of takeover, the acquirer company tries to acquire the target company secretly. This kind of takeover happens when the management of the target company is reluctant in accepting the offer of the acquirer company pertaining to the takeover.
Prior approval of RBI is required in case significant changes would be made in the management and control of the target company. The conditions that require prior approval of RBI are:
The approval from RBI is not required in the following conditions:
An application is required to be made to the RBI on the letterhead of the company. Below given documents are required to be attached with the application:
Application for registration has to be made online at RBI’s official COSMOS website after physical submission of copy of the application at the Regional Office of RBI.
Both online and offline NBFC application procedures are required to be followed by the applicants. There are two departments of the Reserve Bank of India that supervise and regulate the functioning of NBFCs in India.
It is the responsibility of this department to conduct Fresh NBFC Registration process and making regulations for NBFC. It has a clear and advanced evaluation process pertaining to the NBFC application.
As a part of the registration process, if any additional documents are required, this department will send you a formal notice or an e-mail asking for the same. A response to the e-mail/notice is expected by the RBI within 30 days of the receipt o the e-mail/notice as a per the NBFC regulations.
The post registration compliances by a company and other administrative issues are responsibility of this department. The NBFC license can be expected by the applicant in 90 to 120 days post the successful acceptance of the NBFC application.
Thereafter, company will be registered on the website and the applicant will be required to download an excel form and upload the same again after filling in all the relevant details. Post this, Company Application Reference Number (CARN) will be generated.
Upon receipt of CARN, the applicant will be required to submit the application form physically along with all the relevant documents to the Regional Office of the RBI.
If RBI finds everything appropriate, then license will be issued to the applicant.
If the takeover causes change in management/control, a 30 days prior notice shall be given in one leading national newspaper and one local newspaper stating the transfer of ownership or control by sale of shares (whether with or without transfer of shares).
A public notice indicates the following things:
The entire procedure of NBFC takeover is covered in the following steps:
The foremost step is the signing of the Memorandum of Understanding (MOU) with the proposed company. The MOU signifies that both the companies have agreed to the takeover. The directors of both – the acquirer company and the target company, sign the MOU. The requirements and the responsibilities of both the companies are mentioned in the MOU specifically. At the time of signing the MOU, the acquirer company gives the token money to the target company.
Once the MOU has been signed, both the companies shall convene Board Meeting to discuss the following matter:
Once approval has been obtained from the RBI, a public notice shall be made in two newspapers within 30 days in order to invite any objection of the public with respect to the takeover.
At the expiration of the 31st day of publishing the notice in the newspaper, both the companies shall sign the share transfer agreement. At the time of signing, the balance consideration shall be paid by the acquirer company to the target company.
Prior to transferring the business to the acquirer company, the target company shall obtain NOC from its creditors.
Once NOC has been obtained from the creditors and no creditor has raised any objection in regards to the takeover, the assets of the target company will be transferred to the acquirer company, as approved by the RBI. The transfer, however, should not be in contravention to any clause of the company.
The evaluation of the entity post-takeover shall be done in accordance with the rules provided by the RBI. Post evaluation, a certificate stating the method for valuation shall be obtained from a Chartered Accountant.
Once the valuation is done and approval has been taken, the NBFC shall submit an application on the letterhead of the company to the Regional Office of RBI. Post-takeover, any changes in the management should be continuously intimated to the RBI.
The contents of the application made to the Regional Office of the RBI shall be as follows:
Subsequent to the above-mentioned procedure, all the assets as shown in the balance sheet of the target company shall be liquidated and the liabilities would be paid off. The acquirer company will then receive the balance in the bank account in the name of the target company. The balance will be as calculated on the basis of net worth, as on the date of the takeover.
The takeover of NBFC is an elaborate process and requires multiple compliances. The chief agreements required to complete the takeover are -Memorandum of Understanding and Share Purchase Agreement. Apart from these, public notices for change in management/control, board meetings notice, no objection certificate from creditors and notice to regional office, also form part of the entire takeover process.
For any further queries on takeover of NBFC, drafting of the relevant agreements, or any assistance on NBFC takeover, contact us.
It is pertinent to note that the NBFCs do not include any entity whose principle business is:
At the final stage of takeover, the acquirer is handed over the management and paid the pending consideration, if any. The consideration is to be paid within 31 days of the publishing of the notice in the newspaper. All the assets of the target company on its balance sheet are liquidated and the liabilities are paid off. Hence, the acquirer receives a clear balance in the company’s name which is calculated in accordance with the net worth, as on the date of takeover.
Systematically important NBFCs are those that have an asset size of more than INR 500 crores, as per their last audited balance sheet. The reason for classifying them as systematically important is that they would have a standing on the overall financial stability of the economy.
The powers of RBI with regard to NBFCs, i.e., the companies that meet the 50-50 Principal Business criteria are:
Owned Fund means the sum total of the paid-up equity capital, preference shares which are compulsorily convertible into equity, free reserves, balance in share premium account and capital reserves representing surplus arising out of sale proceeds of asset, excluding reserves created by revaluation of asset, after deducting there from accumulated balance of loss, deferred revenue expenditure and other intangible assets.
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